nep-cba New Economics Papers
on Central Banking
Issue of 2020‒04‒20
thirty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Average inflation targeting and the interest rate lower bound By Flora Budianto; Taisuke Nakata; Sebastian Schmidt
  2. Does the liquidity trap exist? By Stéphane Lhuissier; Benoit Mojon; Juan Rubio-Ramírez
  3. Unconventional Monetary Policy Shocks in the Euro Area and the Sovereign-Bank Nexus By Nikolay Hristov; Oliver Hülsewig; Johann Scharler
  4. Monetary policy, financial regulation and financial stability: A comparison between the Fed and the ECB By Schnabl, Gunther; Sonnenberg, Nils
  5. Multi-Product Pricing: Theory and Evidence from Large Retailers in Israel By Marco Bonomo; Carlos Carvalho; Oleksiy Kryvtsov; Sigal Ribon; Rodolfo Rigato
  6. Heterogeneous Credit Constraints and Optimal Monetary Policy By Marco Ortiz; Gerardo Herrera
  7. Impact of Negative Interest Rate Policy on Emerging Asian markets: An Empirical Investigation By Anand, Abhishek; Chakraborty, Lekha S
  8. Bank Stress Testing: Public Interest or Regulatory Capture? By Thomas Ian Schneider; Philip E. Strahan; Jun Yang
  9. Interest Rate Uncertainty as a Policy Tool By Fabio Ghironi; Galip Kemal Ozhan
  10. The Impact of Monetary Policy on Leading Variables for Financial Stability in Norway By Helene Olsen; Harald Wieslander
  11. Measuring the effects of U.S. uncertainty and monetary conditions on EMEs' macroeconomic dynamics By Rivolta, Giulia; Trecroci, Carmine
  12. Macroprudential stress testing: A proposal for the Luxembourg investment fund sector By Kang-Soek Lee
  13. The interdependence of bank capital and liquidity By Elena Carletti; Itay Goldstein; Agnese Leonello
  14. Banking without Deposits: Evidence from Shadow Bank Call Reports By Erica Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
  15. A Fisherian Approach to Financial Crises: Lessons from the Sudden Stops Literature By Javier Bianchi; Enrique G. Mendoza
  16. Rebalancing the euro area: Is wage adjustment in Germany the answer? By Hoffmann, Mathias; Kliem, Martin; Krause, Michael; Moyen, Stephane; Sauer, Radek
  17. What are the main factors for the subdued profitability of significant banks in the Banking Union, and is the ECB's supervisory response conclusive and exhaustive? A critical assessment of the 2018 SSM report on bank profitability and business models By Farina, Tatiana; Krahnen, Jan Pieter; Pelizzon, Loriana; Wahrenburg, Mark
  18. International Monetary Cooperation Under Tariff Threats By G. Basevi; F. Delbono; V. Denicolo
  19. The Economics of the Fed Put By Anna Cieslak; Annette Vissing-Jorgensen
  20. Contagion of Fear By Kris James Mitchener; Gary Richardson
  21. Adopting the Euro: a synthetic control approach By Gabriel, Ricardo Duque; Pessoa, Ana Sofia
  22. Price setting frequency and the Phillips Curve By Gasteiger, Emanuel; Grimaud, Alex
  23. Lead-lag and relationship between money growth and inflation in Turkey: New evidence from a wavelet analysis By Tursoy, Turgut; Mar'i, Muhammad
  24. Monopsony with nominal rigidities: An inverted Phillips Curve By Dennery, Charles
  25. Central Bank Communication during Economic Recessions: Evidence from Nigeria By Omotosho, Babatunde S.
  26. Optimal Policy Perturbations By Régis Barnichon; Geert Mesters
  27. A New Indicator of Bank Funding Cost By Eric Jondeau; Benoit Mojon; Jean-Guillaume Sahuc
  28. Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters By Giancarlo Corsetti; Meredith Crowley; Lu Han
  29. Home sweet host: Prudential and monetary policy spillovers through global banks By Stefan Avdjiev; Bryan Hardy; Patrick McGuire; Goetz von Peter
  30. The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries By Claudiu Tiberiu Albulescu; Dominique Pépin; Stephen Miller
  31. Forecasting exchange rates of major currencies with long maturity forward rates By Zsolt Darvas; Zoltán Schepp
  32. Banking Crises without Panics By Matthew Baron; Emil Verner; Wei Xiong

  1. By: Flora Budianto; Taisuke Nakata; Sebastian Schmidt
    Abstract: Assigning a discretionary central bank a mandate to stabilize an average inflation rate - rather than a period-by-period inflation rate - increases welfare in a New Keynesian model with an occasionally binding lower bound on nominal interest rates. Under rational expectations, the welfare-maximizing averaging window is infinitely long, which means that optimal average inflation targeting (AIT) is equivalent to price level targeting (PLT). However, AIT with a finite, but sufficiently long, averaging window can attain most of the welfare gain from PLT. Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting AIT can be small.
    Keywords: monetary policy objectives, makeup strategies, liquidity trap, deflationary bias, expectations
    JEL: E31 E52 E58 E61
    Date: 2020–04
  2. By: Stéphane Lhuissier; Benoit Mojon; Juan Rubio-Ramírez
    Abstract: The liquidity trap is synonymous with ineffective monetary policy. The common wisdom is that, as the short-term interest rate nears its effective lower bound, monetary policy cannot do much to stimulate the economy. However, central banks have resorted to alternative instruments, such as QE, credit easing and forward guidance. Using state-of- the-art estimates of the effects of monetary policy, we show that monetary easing stimulates output and inflation, also during the period when short-term interest rates are near their lower bound. These results are consistent across the United States, the euro area and Japan.
    Keywords: liquidity trap, effective lower bound, monetary transmission
    JEL: E32 E44 E52
    Date: 2020–04
  3. By: Nikolay Hristov; Oliver Hülsewig; Johann Scharler
    Abstract: We explore the effects of the ECB’s unconventional monetary policy on the banks’ sovereign debt portfolios. In particular, using panel vector autoregressive (VAR) models we analyze whether banks increased their domestic government bond holdings in response to non-standard monetary policy shocks, thereby possibly promoting the sovereign-bank nexus, i.e. the exposure of banks to the debt issued by the national government. Our results suggest that euro area crisis countries’ banks enlarged their exposure to domestic sovereign debt after innovations related to unconventional monetary policy. Moreover, the restructuring of sovereign debt portfolios was characterized by a home bias.
    Keywords: European Central Bank, unconventional monetary policy, panel vector autoregressive model, sovereign-bank nexus
    JEL: C32 E30 E52 E58 G21 H63
    Date: 2020
  4. By: Schnabl, Gunther; Sonnenberg, Nils
    Abstract: The paper analyses in light of Austrian and Keynesian economic theory the impact of conventional and unconventional monetary policies as therapies for financial crises. It compares the financial market stabilization measures of the Federal Reserve System and the European System of Central Banks in response to the US subprime crisis and the European financial and debt crisis. It is shown that the Federal Reserve System's crisis measures were more directed towards stabilizing the banking system, whereas the European Central Bank had a stronger focus on the stabilization of the debt affordability of euro area crisis countries. In both cases, household credit growth remained under control despite renewed monetary expansion, while new imbalances emerged in the corporate sector. In the euro area, loose monetary policy had a destabilizing impact on the financial sector.
    Keywords: Financial cycles,financial crisis,financial stability,Hayek,Keynes,monetarypolicy
    JEL: B53 E12 E14 E30 E44 E58 G10 G20 H30 H50
    Date: 2020
  5. By: Marco Bonomo; Carlos Carvalho; Oleksiy Kryvtsov; Sigal Ribon; Rodolfo Rigato
    Abstract: Standard theories of price adjustment are based on the problem of a single-product firm, and therefore they may not be well suited to analyze price dynamics in the economy with multiproduct firms. To guide new theory, we study a unique dataset with comprehensive coverage of daily prices in large multi-product food retailers in Israel. We find that a typical retail store synchronizes its regular price changes around occasional “peak" days when, once or twice a month, it reprices around 10% of its products. To assess the implications of partial price synchronization for inflation dynamics, we develop a new price-setting model in which a firm sells a continuum of products and faces economies of scope in price adjustment. The model generates the partial synchronization pattern with peaks of re-pricing activity observed in the data. We show analytically and numerically that synchronization of price changes attenuates the average price response to a monetary shock; however, only high degrees of synchronization can materially strengthen monetary non-neutrality. Hence, the synchronization of price changes observed in the data is consistent with considerable aggregate price flexibility.
    Keywords: Inflation and prices; Market structure and pricing; Monetary Policy
    JEL: D21 D22 E31 E52 L11
    Date: 2020–04
  6. By: Marco Ortiz (Universidad del Pacífico); Gerardo Herrera (Universidad del Pacífico)
    Abstract: The optimal response to adverse external shocks in an economy involves the choice of a exchange rate policy. While the traditional Mundell-Flemming inspired theories support a floating exchange rate, evidence shows that central banks intervene in foreign exchange markets regularly. One of the reasons for these interventions relies on the consequences of large depreciations triggering negative balance sheet effects in economies with dollarized liabilities as shown by Benigno et al. (2013) and Devereux and Poon (2011). This paper extends this literature by introducing heterogeneity in credit constraints across sectors. Our findings support that "leaning against the wind" policy responses are optimal even when only a sector of the economy is affected by the credit constraints. Thus, relative price distortions provide an additional justification for these policies. We show that the vulnerability of the economy to large negative external shocks depends not only on the overall unhedged foreign debt, but also on its distribution across sectors.
    JEL: E5 F3 G15
    Date: 2020–02
  7. By: Anand, Abhishek; Chakraborty, Lekha S
    Abstract: In last few years, several central banks have implemented negative interest rate policies (NIRP) to boost domestic economy. However, such policies may have some unintended consequences for the emerging Asian markets (EAMs). The objective of this paper is to provide an assessment of the domestic and global implications of negative interest rate policy. We also present how the implications differ from that of quantitative easing (QE). The analysis shows that the impact NIRP is heterogeneous; with differential impacts for big Asian economies (India and Indonesia) and small trade dependent economies (STDE) (Hong Kong, Philippines, South Korea, Singapore and Thailand). Nominal GDP and exports are adversely impacted in EMs in response to NIRP, especially in India and Indonesia. The inflation goes significantly high in EMs in response to plausible negative interest rates but the impact is much more severe for India and Indonesia than in STDEs. The local currencies also depreciate in all EAMs in response to negative interest rates. QE, on the other hand, has no significant impact on inflation but nominal GDP growth declines in EAMs. The currency appreciates and exports decline. The impact is much more severe in big emerging economies like India and Indonesia Key words: Negative interest rate policy, Quantitative easing, emerging economies JEL codes: E52, E58.
    Keywords: Negative interest rate policy, Quantitative easing, emerging economies JEL codes: E52, E58.
    JEL: E52 E58
    Date: 2019
  8. By: Thomas Ian Schneider; Philip E. Strahan; Jun Yang
    Abstract: We test whether measures of potential influence on regulators affect stress test outcomes. The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests. In contrast, we find no evidence that either political or regulatory connections affect the tests. Stress tests have a greater effect on the value of large trading banks’ portfolios; the large trading banks respond by making more conservative capital plans; and, despite their more conservative capital plans, the large trading banks still fail their tests more frequently than other banks. These results are consistent with a public-interest view of regulation, not regulatory capture.
    JEL: G21
    Date: 2020–03
  9. By: Fabio Ghironi; Galip Kemal Ozhan
    Abstract: We study a novel policy tool—interest rate uncertainty—that can be used to discourage inefficient capital inflows and to adjust the composition of external account between shortterm securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate passthrough. We further investigate new channels under different assumptions about the irreversibility of FDI, the currency of export invoicing, risk aversion of outside agents, and effective lower bound in the rest of the world. Under every scenario, uncertainty policy is inflationary.
    Keywords: International financial markets; Monetary policy framework; Uncertainty and monetary policy
    JEL: E32 F32 F38 G15
    Date: 2020–04
  10. By: Helene Olsen; Harald Wieslander
    Abstract: We search for leading determinants of financial instability in Norway using a signaling approach, and examine how these respond to a monetary policy shock with the use of structural VAR models. We find that the wholesale funding ratio and gap, credit-to-GDP gap, house price-to-income ratio and gap, and credit growth provide good signals of future financial instability. Following a contractionary monetary policy shock, the credit-to-GDP gap and house price-to-income ratio decrease significantly. The implication of our findings is that the central bank can respond to an increase in these indicators by increasing the interest rate, which in turn will decrease the indicators and thereby the probability of financial distress.
    Keywords: Financial stability, Monetary policy, Structural VAR, Signaling Approach
    Date: 2020–03
  11. By: Rivolta, Giulia; Trecroci, Carmine
    Abstract: We explore empirically the transmission of U.S. financial and macroeconomic uncertainty to emerging market economies (EMEs). We start by assuming that there are crucial differences between volatility and uncertainty, and between the latter and its shocks. With the help of Bayesian vector autoregressions, we first identify two measures of U.S. uncertainty shocks, which appear to explain the dynamics of output developments better than conventional volatility measures. Next, we find evidence that adverse shocks to U.S. aggregate uncertainty are associated with marked contractions in some EMEs’ business cycles. However, we detect significant cross-country heterogeneity in the responses of EMEs’ business cycles to U.S uncertainty shocks. We also find generalized declines in stock market values, which supports the so-called Global Financial Cycle hypothesis.
    Keywords: Uncertainty, Monetary policy, Asset prices, Emerging markets.
    JEL: C11 C31 E44 E52 E58 F36
    Date: 2020–04–01
  12. By: Kang-Soek Lee
    Abstract: This paper assesses ‘aggregate vulnerability’, a measure of systemic risk, in the investment fund sector of Luxembourg by implementing a macroprudential stress testing model. While based on the proposal by Fricke and Fricke (2017), this paper focuses on the calibration of key parameters such as the flow-performance sensitivity and price impacts that are included in the model to capture the so-called ‘second-round effects’ of an initial adverse shock to funds’ returns. According to the empirical results, limited degrees of vulnerability were found for the main fund categories such as equity funds, bond funds and mixed funds. This implies that the investment fund sector in Luxembourg does not raise any particular concern for financial stability as of November 2019. However, since the stress test was performed against a background of increased risk of a reversal in global risk premia, continued monitoring of the sector is warranted.
    Keywords: investment funds; macroprudential stress test; flow-performance sensitivity; price impact; fire sales; systemic risk
    JEL: G11 G12 G23
    Date: 2020–03
  13. By: Elena Carletti; Itay Goldstein; Agnese Leonello
    Abstract: This paper analyzes the role of liquidity regulation and its interaction with capital requirements. We ?first introduce costly capital in a bank run model with endogenous bank portfolio choice and run probability, and show that capital regulation is the only way to restore the efficient allocation. We then enrich the model to include ?re sales, and show that capital and liquidity regulation are complements. The key implications of our analysis are that the optimal regulatory mix should be designed considering both sides of banks? balance sheet, and that its effectiveness depend on the costs of both capital and liquidity.
    Keywords: illiquidity, insolvency, ?re sales, optimal regulation
    JEL: G01 G21 G28
    Date: 2019
  14. By: Erica Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: Is bank capital structure designed to extract deposit subsidies? We address this question by studying capital structure decisions of shadow banks: intermediaries that provide banking services but are not funded by deposits. We assemble, for the first time, call report data for shadow banks which originate one quarter of all US household debt. We document five facts. (1) Shadow banks use twice as much equity capital as equivalent banks, but are substantially more leveraged than non-financial firms. (2) Leverage across shadow banks is substantially more dispersed than leverage across banks. (3) Like banks, shadow banks finance themselves primarily with short-term debt and originate long-term loans. However, shadow bank debt is provided primarily by informed and concentrated lenders. (4) Shadow bank leverage increases substantially with size, and the capitalization of the largest shadow banks is similar to banks of comparable size. (5) Uninsured leverage, defined as uninsured debt funding to assets, increases with size and average interest rates on uninsured debt decline with size for both banks and shadow banks. Modern shadow bank capital structure choices resemble those of pre-deposit-insurance banks both in the U.S. and Germany, suggesting that the differences in capital structure with modern banks are likely due to banks’ ability to access insured deposits. Our results suggest that banks’ level of capitalization is pinned down by deposit subsidies and capital regulation at the margin, with small banks likely to be largest recipients of deposit subsidies. Models of financial intermediary capital structure then have to simultaneously explain high (uninsured) leverage, which increases with the size of the intermediary, and allow for substantial heterogeneity across capital structures of firms engaged in similar activities. Such models also need to explain high reliance on short-term debt of financial intermediaries.
    JEL: G2 L5
    Date: 2020–03
  15. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: Sudden Stops are financial crises defined by a large, sudden current-account reversal. They occur in both advanced and emerging economies and result in deep recessions, collapsing asset prices, and real exchange-rate depreciations. They are preceded by economic expansions, current-account deficits, credit booms, and appreciated asset prices and real exchange rates. Fisherian models (i.e. models with credit constraints linked to market prices) explain these stylized facts as an outcome of Irving Fisher's debt-deflation mechanism. On the normative side, these models feature a pecuniary externality that provides a foundation for macroprudential policy (MPP). We review the stylized facts of Sudden Stops, the evidence on MPP use and effectiveness, and the findings of the literature on Fisherian models. Quantitatively, Fisherian amplification is strong and optimal MPP reduces sharply the size and frequency of crises, but it is also complex and potentially time-inconsistent, and simple MPP rules are less effective. We also provide a new MPP analysis incorporating investment. Using a constant debt-tax policy, we construct a crisis probability-output frontier showing that there is a tradeoff between financial stability and long-run output (i.e., reducing the probability of crises reduces long-run output).
    JEL: E3 E37 E44 F41 G01 G18
    Date: 2020–03
  16. By: Hoffmann, Mathias; Kliem, Martin; Krause, Michael; Moyen, Stephane; Sauer, Radek
    Abstract: We assess to what extent wage inflation policies in Germany could contribute to an economic rebalancing in the euro area and the rest of the world. We find that a rise in nominal wage inflation has positive short-run effects on inflation and output in Germany and the rest of the euro area. The duration of constant interest rates and expectations about the monetary policy stance matter to the magnitude of the results obtained. We establish that the modelling of the trade relationships with the rest of the world is of particular importance, as it allows to capture the induced relative price movements and hence changes in competitiveness within the three regions. Our results are obtained from an estimated DSGE model which consists of Germany, the rest of the euro area, and the rest of the world.
    Keywords: DSGE model,Bayesian estimation,Monetary policy,Trade balance
    Date: 2020
  17. By: Farina, Tatiana; Krahnen, Jan Pieter; Pelizzon, Loriana; Wahrenburg, Mark
    Abstract: In this paper we argue that the own findings of the SSM THEMATIC REVIEW ON PROFITABILITY AND BUSINESS MODEL and the academic literature on bank profitability do not provide support for the business model approach of supervisory guidance. We discuss in the paper several reasons why the regulator should stay away from intervening in management practices. We conclude that by taking the role of a coach instead of a referee, the supervisor generates a hazard for financial stability.
    Keywords: Bank Profitability,Supervisory Guidance,Banking Union,Financial regulation
    Date: 2019
  18. By: G. Basevi; F. Delbono; V. Denicolo
    Abstract: We analyze games between two countries that use the tariff as a threat to induce each other to follow monetary policies equivalent to those that would obtain under a cooperative game. The analysis shows that under certain assumptions concerning the shares of tariff revenues that the countries spend on imports, the punishment structure, and the discount factors, the outcome of the games converges to a monetary policies. It is suggested that the model could be applaied to current relations between the US, Germany and Japan.
  19. By: Anna Cieslak; Annette Vissing-Jorgensen
    Abstract: Since the mid-1990s, low stock returns predict accommodating policy by the Federal Reserve. This fact emerges because, over this period, negative stock returns comove with downgrades to the Fed’s growth expectations. Textual analysis of the FOMC documents reveals that policymakers pay attention to the stock market, and their negative stock-market mentions predict federal funds rate cuts. The primary mechanism why policymakers find the stock market informative is via its effect on consumption, with a smaller role for the market viewed as predicting the economy.
    JEL: E44 E52 E58
    Date: 2020–03
  20. By: Kris James Mitchener; Gary Richardson
    Abstract: The Great Depression is infamous for banking panics, which were a symptomatic of a phenomenon that scholars have labeled a contagion of fear. Using geocoded, microdata on bank distress, we develop metrics that illuminate the incidence of these events and how banks that remained in operation after panics responded. We show that between 1929-32 banking panics reduced lending by 13%, relative to its 1929 value, and the money multiplier and money supply by 36%. The banking panics, in other words, caused about 41% of the decline in bank lending and about nine-tenths of the decline in the money multiplier during the Great Depression.
    Keywords: banking panics, Great Depression, contagion, monetary deflation
    JEL: E44 G01 G21 L14 N22
    Date: 2020
  21. By: Gabriel, Ricardo Duque; Pessoa, Ana Sofia
    Abstract: We investigate whether joining the European Monetary Union and losing the ability to set monetary policy affected the economic growth of 12 Eurozone countries. We use the synthetic control approach to create a counterfactual scenario for how each Eurozone country would have evolved without adopting the Euro. We let this matching algorithm determine which combination of other developed economies best resembles the pre-Euro path of twelve Eurozone economies. Our estimates suggest that there were some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland). Nevertheless, a GDP decomposition analysis suggests that the drivers of the economic gains and losses are heterogeneous.
    Keywords: Monetary union, Eurozone, Macroeconomic performance, Synthetic control method, GDP decomposition
    JEL: C32 E02 E30 E60 E65
    Date: 2020–03
  22. By: Gasteiger, Emanuel; Grimaud, Alex
    Abstract: We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price in a given period depends on an analysis of expected cost and benefits modelled by a discrete choice process. A firm decides to update the price when expected benefits outweigh expected cost and then resets the price optimally. As markups are countercyclical, the model predicts that prices are more flexible during expansions and less flexible during recessions. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behaviour: is consistent with micro data on price setting frequency; gives rise to an accelerating Phillips curve that is steeper during expansions and flatter during recessions; explains shifts in the Phillips curve associated with different historical episodes without relying on implausible high cost-push shocks and nominal rigidities.
    Keywords: Price setting,inflation dynamics,monetary policy,Phillips curve
    JEL: E31 E32 E52
    Date: 2020
  23. By: Tursoy, Turgut; Mar'i, Muhammad
    Abstract: The study investigates the relationship between money supply and inflation and Turkey by employing wavelet analysis, mainly continuous wavelet analysis, cross wavelet transforms and wavelet coherence and phase-difference, for the period from 1987 to 2019. Our main finding confirms the modern quantity theory of money about the existence of a relationship between inflation and money supply in the short-run and long-run, and also confirms the traditional quantity theory of money about the existence of a relationship in the long run. The phase difference confirms the existence of a bidirectional relationship between money supply and inflation. The result is consistent with both the traditional quantity theory of money in the long run and the modern quantity theory of money in the short-run and long-run in terms of the existence of a relationship between money supply and inflation.
    Keywords: Money supply, inflation, wavelet analysis, Turkey, the quantity theory of money.
    JEL: E4 E5
    Date: 2020–04–12
  24. By: Dennery, Charles
    Abstract: With nominal wage rigidities, it is crucial to distinguish whether wages are set by workers or firms — whether we have monopoly or monopsony power. This paper provides a model of monopsony power in the labour market and a monopsonistic Phillips Curve. If wages are set by firms who face nominal rigidities, and there is inflation, firms cannot adjust their wages fully. The real wage falls, and labour supply hence output decreases. This provides a Phillips Curve where the output gap is negatively correlated with wage inflation. In such a world monetary policy affects the intertemporal labour supply, while the Phillips Curve is a labour demand curve. Interest rate cuts reduce the labour supply instead of boosting demand: they are contractionary.
    Keywords: Monopsony ; Nominal rigidities ; Phillips curve
    JEL: E2 E5 J4
    Date: 2019–12
  25. By: Omotosho, Babatunde S.
    Abstract: This paper analyses the communication strategy of the Central Bank of Nigeria (CBN) during the 2016 economic recession. Applying text mining techniques, useful insights are derived regarding the linguistic intensity, readability, tone, and topics of published monetary policy communiques. Our results provide evidence of increased central bank communication during the recession. However, the ease of reading the published policy communiques declined, especially at the outset of the recession. In terms of tone, we find that negative policy sentiments were expressed during the 2015-2017 period; reflecting the economic uncertainties that trailed the oil price slump of 2014 and its implications for the domestic economy. The negativity of the policy sentiment score reached its trough in July 2016 and recorded an inflexion; signalling the economy’s turning point towards recovery. Based on the results of the estimated topic model, issues relating to “oil price shocks”, “external reserves”, and “inflation” were of concern to the Monetary Policy Committee (MPC) a few quarters preceding the recession while the topics relating to “exchange rate management” as well as “output growth and market stability” were dominant during the recession. Expectedly, the topic proportion for “prices and macroeconomic policies” remain relatively sizeable across the sample period, reflecting the MPC’s commitment to the CBN’s primary mandate of maintaining price stability.
    Keywords: Monetary policy, central bank communication, economic recession, text mining
    JEL: E32 E52 E58 E61 E65
    Date: 2020
  26. By: Régis Barnichon; Geert Mesters
    Abstract: Model mis-specification remains a major concern in macroeconomics, and policy makers must often resort to heuristics to decide on policy actions; combining insights from multiple models and relying on judgment calls. Identifying the most appropriate, or optimal, policy in this manner can be challenging however. In this work, we propose a statistic -the Optimal Policy Perturbation (OPP)- to detect "optimization failures" in the policy decision process. The OPP does not rely on any specific underlying economic model, and its computation only requires (i) forecasts for the policy objectives conditional on the policy choice, and (ii) the impulse responses of the policy objectives to shocks to the policy instruments. We illustrate the OPP in the context of US monetary policy decisions. In forty years, we only detect one period with major optimization failures; during 2010-2012 when unconventional policy tools should have been used more intensively.
    Keywords: macroeconomic stabilization, optimal policy, impulse responses, sufficient statistics, forecast targeting
    JEL: C14 C32 E32 E52
    Date: 2020–04
  27. By: Eric Jondeau; Benoit Mojon; Jean-Guillaume Sahuc
    Abstract: The cost of bank funding on money markets is typically the sum of a risk-free rate and a spread that reflects rollover risk, i.e., the risk that banks cannot roll over their short-term market funding. This risk is a major concern for policymakers, who need to intervene to prevent the funding liquidity freeze from triggering the bankruptcy of solvent financial institutions. We construct a new indicator of rollover risk for banks, which we have called forward funding spread. It is calculated as the difference between the three-month forward rate of the yield curve constructed using only instruments with a three-month tenor and the corresponding forward rate of the default-free overnight interest swap yield curve. The forward funding spread usefully complements its spot equivalent, the IBOR-OIS spread, in the monitoring of bank funding risk in real time. First, it accounts for the market participants' expectations for how funding costs will evolve over time. Second, it identifies liquidity regimes, which coincide with the levels of excess liquidity supplied by central banks. Third, it has much higher predictive power for economic growth and bank lending in the United States and the euro area than the spot IBOR-OIS, credit default swap spreads or bank bond credit spreads.
    Keywords: bank funding risk, bank credit spreads, liquidity supply regimes, multicurve environment, economic activity predictability
    JEL: E32 E44 E52
    Date: 2020–04
  28. By: Giancarlo Corsetti; Meredith Crowley; Lu Han
    Abstract: Using administrative data on export transactions, we show that UK firms invoice in multiple currencies — even when shipping the same product to the same destination — and switch invoicing currencies over time. We then provide microeconometric evidence that the currency in which a cross-border sale is invoiced predicts systematic differences in exchange rate pass-through and destination-specific markup adjustment, at the granular level of firm-productdestination and time. Based on an event study around the 2016 Brexit depreciation and econometric analysis of a longer period (2010-2017), we examine the export price elasticity to the exchange rate measured in sterling to find that this is low for transactions invoiced in producer currency and comparably high for sales invoiced either in a vehicle or in the destination market currency. However, our analysis of markup elasticities reveals that firms price-to-market only when they invoice sales in the destination market currency. Altogether, our findings imply that currency movements may cause significant short-run deviations from the law of one price not only across but also within borders; these are systematically linked to the firm’s choice of invoicing currencies. Dynamically, we find that the stark differences in price changes across invoicing currencies that emerged in the aftermath of the Brexit depreciation atrophied within six quarters, as all prices came to align broadly with the weaker pound. These findings enrich our understanding of the ‘international price system’ underpinning the international transmission of shocks (Gopinath (2015)), with crucial implications for open macro modelling and policy design.
    Keywords: exchange rates, pass through, law of one price, markup elasticity, vehicle currency, dominant currency, firm level data
    JEL: F31 F41
    Date: 2020–03
  29. By: Stefan Avdjiev; Bryan Hardy; Patrick McGuire; Goetz von Peter
    Abstract: Prudential regulation of banks is multi-layered: policy changes by home-country authorities affect banks' global operations across many jurisdictions; changes by host-country authorities shape banks' operations in the host jurisdiction regardless of the nationality of the parent bank. Which layer matters most? Do these policies create cross-border spillovers? And how does monetary policy alter these spillovers? This paper examines the effect that changes in home- and hostcountry prudential measures have on cross-border credit, and how these interact with monetary policy. We use a novel approach to decompose growth in cross-border bank lending into separate home, host and common components, and then match each with the home or host policies that affect this component. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross-border US dollar lending than host policies, primarily through substitution effects. We also find that a tightening of US monetary policy can compound the spillovers of certain prudential measures.
    Keywords: international banking, prudential policy, international policy coordination and transmission, currencies, international spillovers
    JEL: F42 G21 L51
    Date: 2020–04
  30. By: Claudiu Tiberiu Albulescu (UPT - Politehnica University of Timisoara - Politehnica University of Timisoara); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Stephen Miller (WGU Nevada - University of Nevada [Las Vegas])
    Abstract: This paper investigates and compares currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro. In addition, we develop a model with microeconomic foundations, which identifies difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to money demand sensitivity to the interest rate spread between the CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries.
    Keywords: currency substitution,cointegration,money demand,open economy model,CEE countries
    Date: 2019–06
  31. By: Zsolt Darvas; Zoltán Schepp
    Abstract: The theoretical derivation of our forecasting equation is consistent with the monetary model of exchange rates. Our model outperforms the random walk in out-of-sample forecasting of twelve major currency pairs in both short and long horizons forecasts for the 1990-2020 period. The results are robust for all sub-periods with the exception of years around the collapse of Lehman Brothers in September 2008. Our results are robust to alternative model specifications,...
    Date: 2020–04
  32. By: Matthew Baron; Emil Verner; Wei Xiong
    Abstract: We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress both with and without banking panics. To do this, we construct a new dataset on bank equity returns and narrative information on banking panics for 46 countries over the period 1870-2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. While panics can be an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We also use bank equity returns to uncover a number of forgotten historical banking crises and to create a banking crisis chronology that distinguishes between bank equity losses and panics.
    JEL: G01 G21
    Date: 2020–03

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